Economic Policy Review ISSN 1313 - 0544

Budget Heritage of the New Government

Author: Veliko Dimitrov / 04.08.2009
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European and national elections have finished and the new government has been formed. Because there is rarely vacuum in the executive on such a level (the recent crisis in Belgium was yet such an example), the next government, as all preceding ones, will have to take over the government of the country from where it has been left. Or in other words, it is important not only which political party has actually won the elections, but also what economic and institutional conditions it has inherited from the previous one/ones.

If we even for a moment leave aside all the non-realized reforms in the pension, health care and education systems, the state monopoly and the resulting very high prices in the energy sector, the agriculture (agents struggling not for higher productivity and more markets, but for EU and national subsidies), the judicial system and stopped or curtailed EU funds, yet we still can talk about a lot. 

For many years for the first time, the realization of the state budget is under question as if it should fail, the negative consequences would spread to the whole society - delayed payments in the public sector in the form of pensions and contractual agreements, further utilization of funds accumulated during the last decade in the fiscal reserve, lower credit ratings of Bulgarian public and private entities respectively, thus higher risk premium sought by investors; also probably higher tax rates in the future if budget expenditures do not get urgently revised, and so on down the spiral.  

One of the many questions is what the actual state of the budget at the moment is, what tendency is to be expected until the end of the year and of course what could be done to prevent the occurrence of the described in the previous paragraph effects.

In the end of April, the revenues in the state budget amounted to 5,94 billion leva or over half a billion less compared to the same period of the last year (6,55 bn lv.). In relative terms, the realization of the revenue part of the budget against the parameters set in the State Budget Act has reached 28,4% as for the same period of the previous year, this indicator has been 35,8%. Indeed in short run the revenue side of the budget depends to a certain extent on the international conditions, which in fact have rapidly worsened over the past year and a half, yet this outcome was expected (or should have been), thus at the start of budget procedure '09 this could have been taken into account. Nevertheless the budget was drawn up based on 6,0% growth of GDP, even higher growth of FDI and other unrealistically optimistic assumptions.

If the budget in and out tendency up to now should remain the same, by the end of the year it is highly probable that the revenues will have been about or even over 20% less than expected. Or in other words, the incoming government may not be able to fulfill the incoming side of the budget for the year, which had yet been drawn up by the outgoing one. 

As in regard to the expenditures side of the budget, things are slightly different. According to the latest released data, by the end of April the state expenditures amounted to 5,56 bn lv. or 27,1% of the total expenditures while for the same period of the previous year, the realization of the expenditure part was 28,0%. The right question now is why after the realization of the revenue part over the past few months has been steadily declining down to 7,4% in the end of April, the expenditures remain at almost the same level as a percentage of all set expenditures, of course higher in nominal values (by almost one billion leva). Besides, the fact that the realization of the expenditures side is at a certain level at a certain point of time, unlike the revenue side, this does not mean that this "performance" cannot be (over)boosted and a raise could be read and reported in the next period. Or in other words, despite the fact that all data clearly show a negative tendency in the state income accounts, planned expenditures have not been curtailed by the outgoing government and are still increasing in nominal terms.

There is certainly not a lot of economic sense behind what is happening - all the risks and potential negative implications of worsening the macroeconomic situation in the country exceed by far the temporary positive impulses as generated higher internal demand; moreover  only if the latter fulfills the condition of allocation in value-generating sectors.

Because each effect has a cause, it is interesting to take a look at what would be the cause of action of the outgoing government in this case. As a whole, all logical explanations here could be boiled down to two: given the implemented tight fiscal policy in the first three years of the last government, in the middle and especially by the end of 2008, all high-ranked officials of the Ministry of Finance have suddenly lost their sense of reality or have been radically misled by foreign / national experts. The second logical explanation is in fact some better or worse understanding of state overspending and all potential negative economic effects of all these officials, yet, because of the fact that these treacherous impacts could be expected only in a while, the actions had been taken or not prevented because all of the political negatives will be borne by the incoming government.